Investing could be an effective way to grow your wealth for the future, potentially helping you combat the effects of inflation. It may also make it easier to fund your lifestyle in retirement and achieve other financial goals such as supporting family members or purchasing a second home.

However, it is important to consider the potential hurdles involved with investing. The most obvious being that the value of your investments could go down as well as up, so you always adopt some level of risk.

You also need to be aware of the tax you might pay on your investments and how this could affect your returns. This is something that people often underestimate.

Fortunately, there may be ways to mitigate a large tax bill.

The Dividend Allowance will fall to £500 on 5 April 2024

There are several taxes you may pay on your investments, including Dividend Tax. You may pay tax on any dividends you receive – from non-ISA investments – that exceed your Dividend Allowance. This stands at £1,000 in the 2023/24 tax year.

The rate of tax that you pay depends on your marginal rate of Income Tax. You could pay:

• 8.75% if you are a basic-rate taxpayer
• 33.75% if you are a higher-rate taxpayer
• 39.35% if you are an additional-rate taxpayer.

In the Spring Budget, chancellor Jeremy Hunt announced that the Dividend Allowance would fall to £500 on 5 April 2024 meaning you are more likely to pay Dividend Tax in the near future.

The Capital Gains Tax Annual Exempt Amount will halve to £3,000 on 5 April 2024

In the 2023/24 tax year, you can earn up to £6,000 in profits from selling or exchanging ownership of assets before paying tax. This is known as your “Annual Exempt Amount”.

Any profits that exceed your Annual Exempt Amount may be subject to Capital Gains Tax (CGT). Like Dividend Tax, the rate you pay depends on your marginal rate of Income Tax.

You could pay:

• 10% if you are a basic-rate taxpayer (18% when selling a residential property that isn’t your main home)
• 20% if you are a higher- or additional-rate taxpayer (28% when selling a residential property that isn’t your main home).

You may be more likely to pay CGT in 2024/25 and beyond as the chancellor also announced that the Annual Exempt Amount will halve to £3,000 on 5 April 2024.

Luckily, there are ways to potentially mitigate Dividend Tax and CGT, so you can maximise your returns and improve your ability to reach your financial goals.

Three effective ways to potentially reduce the tax you pay on your investments

1. Use your full ISA allowance

An ISA is an excellent tax-efficient saving and investing vehicle that could help you to reduce the amount of tax you pay.

You typically do not pay any Dividend Tax on dividends you receive from investments in a Stocks and Shares ISA. You do not pay any CGT when selling investments through an ISA either.

Additionally, withdrawals from an ISA are tax-free. As such, you are free to buy and sell investments, and take dividends without facing a tax charge.

You can contribute up to £20,000 across all your ISAs in 2023/24. You may want to use as much of this allowance as possible before investing outside an ISA, so you can potentially reduce the tax that you pay.

2. Be strategic with your CGT Annual Exempt Amount

If you plan to sell investments outside an ISA, you may want to consider how much of your CGT Annual Exempt Amount you have already used in the current tax year, if any.

By being strategic about how and when you sell assets, you may be able to reduce the tax you pay. One of the most common ways to do this is by spreading a sale across multiple tax years, so you can avoid exceeding your Annual Exempt Amount.

For instance, you purchased some non-ISA shares for £5,000, and they are now worth £15,000. If you sell them, you have earned a £10,000 profit.

Once the Annual Exempt Amount of £6,000 is applied, you then pay tax on the remaining £4,000. As a higher- or additional-rate taxpayer, you would pay £800 in tax (20% of £4,000).

Conversely, if you decided to only sell £11,000 worth of shares, your profits would be £6,000. Provided you do not sell any other assets in the 2023/24 tax year, you have not exceeded the Annual Exempt Amount so would not pay any tax on the profits.

If you split the sale of the remaining shares over subsequent tax years, you may not pay any CGT at all.

Bear in mind that you can’t carry any unused Annual Exempt Amount over to the following tax year. As such, you may want to use as much of it as possible without exceeding it each year.

Additionally, you can usually transfer assets to your spouse without paying CGT. When they come to sell the asset, they may still pay CGT.

This is calculated based on the value of the asset when you purchased it, compared with its value when they sell it. However, the profits will count towards their Annual Exempt Amount, not yours.

So, by transferring assets to your spouse before selling them, you make use of both Annual Exempt Amounts and can potentially reduce the CGT you pay.

3. Consider tax-efficient investment options

Certain investment types are more tax-efficient than others, even when held outside an ISA. If you have already used your full ISA allowance, you may want to consider some of these options.

For example, any money you win from Premium Bonds is tax-free and bonds issued by the UK government are normally exempt from CGT.

You may also consider investing in companies that qualify for the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). The government offers certain tax benefits to encourage people to invest in new and growing businesses through this scheme.

You may be able to take advantage of this to reduce the tax you pay on your investments. That said, the rules can be quite complex and, as high risk investments, there are certain criteria you must meet, so it may be useful to seek professional advice.

Get In Touch

Finding ways to mitigate a large tax bill could help you maximise your investment returns. We can discuss ways to potentially achieve this with you.

Email us at advice@milstedlangdon.co.uk for more information.

Please Note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.